Brand Names: Important, But Not Key to Investment Decisions

Branding is probably one of the most misunderstood business topics both in terms of its basic definition and function, the problem stems from people viewing brands from the perspective of general consumer awareness as opposed to how that brand is able to influence customer behavior. In the end that's all a brand is: a name given to the set of functional, emotional, positive and negative attributes that comprise the consumer's view of a product, service, company, etc. The strength of a brand isn't so much a function of awareness as it is that brand's ability to cause a consumer to chose Product X over Product Y, even if it means that they have to wait for that product, pay a premium for it, etc, etc.

For instance Circuit City (CC) is as well known a brand as Best Buy (BBY) yet CC is flirting with oblivion while BBY thrives. The reason for is that the Circuit City brand isn't resonating with customers in a way that is causing them to spend their money with CC over their other alternatives. Another example is my college track team that had many athletes refusing to wear the free sneakers provided by the school's athletic sponsor and electing to purchase Nike (NKE) products with their own money; and/or the fact that many of my high school teammates asked the schools recruiting us who their athletic sponsor was in hopes that it was Nike or Adidas (ADDYY.PK). In short these athletes were saying: "We have so little faith in that brand that we wouldn't use their products even if you gave them to us for free" .

I bring this topic up due to recent rumblings about the auto industry, namely the possibility of foreign car makers buying American brands (in order to appear American to consumers), partnerships between automakers, rebadging, tie-ups, etc, etc. While one can articulate a business case for any of these potential moves, the nature of the brands involved determine the potential for success more than any other single factor. American companies looking to turn things around need to address their branding issues more than anything else; there is a reason Toyota (TM) created the Lexus brand for their luxury cars instead of just selling them as pricey Toyotas. If you don't establish "brand credibility" in the minds of the consumer it will be difficult to sell your product let alone get people to try it, even if you're selling a superior product or a product produced by the very competitor the consumers prefer.

E.g. What would be the point of a company like Nissan purchasing say Mercury from Ford (F) or Plymouth from Chrysler (DCX) in order to sell their cars under an "American Brand", when it's a brand that the marketplace has more or less rejected in favor of companies like Nissan (NSANY)?

Finally, what does this mean for investors?

It means it's probably not wise to make an investment decision based on a company's brand being well known, because it's not especially valuable to have a well known brand if it doesn't spur consumers to choose that brand over the competition. It also means that a company doesn't truly have a brand if there is nothing about it that drives consumers to make it their ideal choice, you have a strong brand when consumers chose the competition only when they have no other options and feel as if they were forced to choose something inferior. 

Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Comments

[Deep Value:]

Good article. Branding is extremely important, no doubt. But from an investment perspective would you consider a company to have a strong brand even if it didn't translate to higher ROIC compared to its competition?

Isn't a company's brand or any other 'qualitative' measure only as significant as the quantitative evidence of its existence. In other words, a company with a strong brand should have higher margins than a company with a weak brand. If not, that company must not have a strong brand if it doesn't translate into pricing power.

True or no?

2008 Aug 15 11:20 PM

[Paul Killinger:]

I fully agree with the importance of this marketing concept.

So, then, does it follow that Chevy should delete their name from their new electric cars, and simply brand them as "Volts"?

2008 Aug 16 09:20 AM

[mgv11:]

It would seem GM should work on improving the brand name in the minds of americans, then they might have some pricing power. The problem is these things take time, especially with large purchases like a car. If GM could sell a "Volt" without someone thinking GM/Chevy but instead Toyota, yes they'd be fine. CC needs to change the experience in their customers minds. An example of that kind of change is what is happening at Six Flags. These things take years even with good management and the resulting improved branding. Bad management and we have GM and CC today.

2008 Aug 16 11:11 AM

[mgv11:]

Second thought, this is why I say why not steal the succesful ideas of your competitors, differentiation can be attained after succesful branding but is not the same thing.

2008 Aug 16 11:13 AM

[Markham Lee_:]

First thanks for reading (as always).

Deep Value: I think that if you have two companies selling similar products and company A cannot demand either a higher premium and/or has customers who will refuse to buy the products of company B, then you cannot say they have the stronger brand.

Now it's hard to make general statements without having a specific product in mind, but really you need to have both: pricing power and customers who will refuse to patronize the competition. A truly strong brand should be one where the customer is more concerned about the product attributes then price, and has little to no interest in dealing with substitutes.

Perhaps the best example is what many people say about BMW drivers: "they would rather drive used BMWs then new models of other car makers".

As for GM you have a company that people see as the low cost provider, a company that doesn't exactly hold the public's confidence with respect to being a leader in automotive technology. So the car starts out at a deficit because some will be more skeptical about then they would a Honda or Toyota Volt.

Working out a partnership where it's quietly sold under a stronger brand name isn't a bad idea.

-M

2008 Aug 16 10:25 PM

[PhillyD:]

You guys must be young ... very young. I am 49 and I remember in the 70's and early 80's how the Japenese brands were considered cheap and not well put together. However, through tremendous improvements and great marketing (R&T, MT, and C&D have been a HUGE part of their success) have now turned the tables.

Through better products (which they now make) and some better marketing (they still suck) the American Brands can once again be considered desirable.

Around the world, if you didn't know, American Car Companies are considered desirable. Ford is HUGE in Europe (of course they sell a better looking car their) and GM sells more Buicks in China than they do in the U.S. (yes that's true.) We in America think it's it's passe to drive American and fawn over the Japenese cars (I know this - I've owned 5 new Honda's and Acuras.) I've now bought American in the past 11 years and have NOT been dissappointed. They are every bit as good as the Japense versions.

Now in JD Power the American Cars have finished 4 out of the top 12 spots. The Japense have 4. The Germans 2 and the South Koreans 2. It sounds like, to me, we're building the better product. Now for the Brands to catch up! It will happen.

2008 Aug 16 11:29 PM

[User 169775:]

...Except even though people thought the Japanese cars in the 70s and 80s weren't well-built, they still bought them in droves because they got BETTER FUEL ECONOMY.

This year it's history repeating itself-- People buying Toyota Corollas that can get 30mpg COMBINED (not just highway as GM and Ford have been advertising) because of $4/gallon gas.

Ford and GM needs to realize that not only do they need to build cars that are put together well, they also need to make cars that are MORE FUEL EFFICIENT than the Japanese if they want to regain market share in North America.

The situation in Europe for Ford is not applicable here in North America. Ford is doing well in Europe because they have less-stringent emissions laws, which means Ford's fuel-efficient diesel cars are a big hit there. They can NEVER sell those diesels as-is here, because they don't meet the EPA's Tier2 emissions standards.

The situation for GM in China is also NOT applicable for the North American market-- GM is doing well in China because gas is still cheap there at $2 a gallon, and the noveau-riche Chinese middle class don't mind buying gas-guzzlers because of that.

Until one of the Big Three can produce a 50mpg car that is street-legal in the U.S. with comparable reliability and cost about the same as the Toyota Prius, they are not going to gain back market share in the era of $4/gallon gas.

(Don't bother mentioning the Chevy Volt. Sucker is going to cost $40,000 and by the time it comes out Toyota will have its 3rd-gen PHEV Prius with similar 40-mile-electric capability in the showrooms for $30,000.)

2008 Aug 17 03:14 AM

[billddrummer:]

I'm nearly 56 and remember gas lines well. But gasoline was a pittance then compared to now.

I believe that the slow decline of the American auto industry began back then, when the industry stubbornly refused to change its product mix to favor smaller vehicles.

As we now see, nothing much has changed.

2008 Aug 18 11:40 AM

[Markham Lee_:]

I would disagree with the notion that American cars are popular overseas, and would instead say that there are some instances where American cars do quite well overseas but they aren't a dominant brand world-wide.

Yes you do see a lot of Ford Mondeos in the U.K. (they're as ubiquitous as Accords) but the overall mix is heavily slanted towards the European brands.

Ditto for a lot of other countries, you may see an American model doing well but not enough (for me anyway) to say that foreigners prefer American.


-M

2008 Aug 18 05:16 PM